Treasury steels itself for massive tax hit from ECJ

The UK is preparing for a crippling hit to tax revenues, as the European
Court of Justice prepares to hand down a decision that experts believe will blow
a multibillion-pound hole in the government’s finances.

The ECJ will announce its decision on the franked investment income GLO, and
it is anticipated that the court will follow the April opinion of the advocate
general, which favoured the taxpayers. It is anticipated that the challenge
could cost the government £7bn, and force the Treasury to make changes to the
tax system in order to protect tax revenues in the future.

The GLO challenges the tax treatment of dividends in the UK. Under the
current regime no tax is charged on dividends paid between British companies,
whereas dividends paid from a foreign subsidiary do incur tax. The case argues
that this is discriminatory under the EC Treaty.

Jonathan Bridges from KPMG’s EU law group said it was likely the ECJ would
follow the opinion of the advocate general, despite recent decisions to the
contrary.

‘There have been a few surprises from the ECJ, most notably on the booze
cruise and IRAP cases, but the differences in tax treatment of UK dividends and
foreign dividends are very clear and ECJ should follow the advocate general,’
said Bridges.

Jason Lester, a partner in international tax services at Ernst & Young,
said if the ECJ decision went against the UK taxman, a massive revamp of the tax
system would be essential.

‘If you look at the Cadbury Schweppes ruling and the FII case, you could have
a situation where a business could move a subsidiary offshore, repatriate a
dividend tax free and still attract interest relief. For the government it is
like staring down a three-barrelled gun,’ said Lester.